Australia unveils $7.4 billion fiscal stimulus plan

ChrisOliver

HONG KONG (MarketWatch) -- Australia unveiled a surprise A$10.4 billion ($7.4 billion) fiscal stimulus package Tuesday designed to bolster the economy in the face of what Prime Minister Kevin Rudd described as the greatest global financial crisis since the Great Depression.

The spending plan includes A$4.8 billion for pensioners and A$3.9 billion for low and middle-income groups. First-time home buyers will receive about A$1.5 billion in additional support measures and about $187 million will go toward a labor-skills program.

"The global financial crisis is the economic equivalent of a rolling national security crisis," the Sydney Morning Herald cited Rudd as telling reporters in Canberra Tuesday.

The spending package, equal to about 1% of gross domestic product, follows additional support to the economy announced recently, including a one-percentage-point interest-rate cut the past week and weekend measures to guarantee banks' deposits and term funding.

"Australia is exposed to the potential drag from the global downturn and its already begun to weigh on the commodity markets which are the lifeblood of their economy," said David Cohn, director of Asian Economic forecasting at Action Economics in Singapore.

Tuesday's measures will double the first-time home buyer's grant to $14,000 for a pre-existing home and triple it to A$21,000 for those who purchase a new home.

As part of the plan, low and middle income families will receive a Christmas bonus of A$1,000 per child, pensioners living alone will receive A$1,400 and pensioner couples will receive A$2,100.

The bonus payments are to be made Dec. 8. The housing bonus will take effect immediately and run for the remainder of fiscal 2008 to 20009

Some analysts said the measures ran the risk of stoking asset-price inflation.

"The major contention that we have with it is the measures to boost the first-home ownership scheme," said Glenn Maguire, Asia Pacific economist in Hong Kong with Societe Generale. "The government seems to have completely overlooked the fact that the entire reason we are in this mess is too many people in the U.S. were given access to first homes, which led to asset inflation and when the cost of servicing that became impossible it led to deflation and the massive defaults that we are seeing now."

Analysts also said the fiscal pumping reduced the pressure on the Reserve Bank of Australia to ease monetary policy later this year.

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